Thursday, October 29, 2009

The Economic Recovery, Part 2: The State of America

DATA RELEASED TODAY SHOWED THAT THE US ECONOMY IS GROWING AGAIN. However, the tenor of coverage was more subdued than you would think appropriate, given that the economy was growing at an annualized rate of 3.5 percent. The reason for the cloud hanging over the good news is rooted in the uncertainty as to how sustainable it is. For one thing, it's clear that a big part of the growth is the direct effect of massive government stimulus that's going to come to an end - and which effects have already mostly passed, for instance the "cash for clunkers" scheme. As an economist in the New York Times noted:

"'That alters the dynamic of a recession and a recovery, and what you’re left with, to some degree, is an artificial recovery,' said Dan Greenhaus, chief economic strategist at Miller Tabak, an investment research firm."

In the wake of soaring government deficits - expected to be over ten percent of GDP this year and for several years to come - weak demand and endless balance of payments deficits (even now with the dollar falling imports are rising faster than exports-, there has been much uncertainty and a lot of talk about the weakening of the US economy.
China, for its part, has tried to escape the addictive but dangerous dance it is in with the USA by floating the idea of replacing the US dollar as the world’s reserve currency. The trouble is – with what? As severalarticlesoutline, there is no clear contender for the role. No other country or currency has the economic size, capital markets and financial solvency to play the role that America does. And the IMF, even if it could do the job as the Chinese have suggested (it lacks the capital markets and stable guarantee of value), won’t because it is a tool of the USA. The USA may want to devalue its currency to restore international competitiveness but it doesn’t want to lose the power of being the currency of international trade, of oil, etc. It wants currency traders and governments to continue to stock it so that the USA can continue to run deficits when it wants and needs and can borrow the money cheap.
Certainly America is still the world’s biggest economic powerhouse.

“The U.S. share of the value of global-equity trading is more than 40 percent. The total value of trading on the New York Stock Exchange in 2006 was greater than all of Europe's combined...
“The U.S. is still the place that foreign capital wants to be and is the largest receiver of foreign direct investment. Nine of the top 50 transnational financial corporations are American, including the top two (Citigroup Inc. and General Electric Capital Corp.). Thirteen of the top 50 non-financial transnational corporations are American, including four of the top eight: General Electric, General Motors Corp., Exxon Mobil Corp. and Ford Motor Co.”

In addition, the US spends more on its military than every other nation on earth combined, counting for over 45 percent of total military spending. These are some of the base facts of a very real US global hegemony. And it is articulated through a system of institutions that are ultimately under the control of the Americans, including the UN, NATO, IMF, World Bank, WTO, et al. The US is not going away any time soon.
Nonetheless there is a shift going on that is seeing the absolute global dominance of the US face challenges that it has not faced since before the Second World War. From a peak of around 50 percent of global GDP immediately following WWII, the US economy now accounts for somewhere in the range of 20-24 percent, depending on the measure – one, which accounts for exchange rate fluctuations puts the US share below 20 percent. Some economists have suggested that China will surpass the US in share of global GDP by 2015.

Internally it also faces challenges with debt reaching unsustainable levels in relation to the GDP. As the first chart shows, personal income in the US has not risen as quickly as GDP, with the shortfall increasingly made up by an expansion of household debt (this figure doesn’t include mortgages). If we compare household debt to the federal debt we see the same curve as the federal debt surpasses GDP. The picture is the same with non-financial business debt. The figures according to the most recent flow of funds report from the Federal Reserve as staggering:

“At the end of the second quarter of 2009, the level of domestic nonfinancial debt outstanding was $34.4 trillion; household debt was $13.7 trillion, nonfinancial business debt was $11.2 trillion, and total government debt was $9.5 trillion. “

This debt has grown as the US has lost unionized manufacturing jobs and switched to a more service oriented economy. There are now almost the same number of people working in the “professional and business sector” as work in “goods producing." According to the US-China Business Council, the percentage of US jobs in manufacturing, for instance, has declined from 16.5 percent in 1987 to around 11 percent in 2005, before the present crisis. The service sector now provides 80 percent of US economic activity. With lower pay and fewer benefits than unionized jobs, personal income has stagnated in the USA at just above the level reached in 1970. With consumer spending accounting for 70 percent of US GDP and incomes stagnant, it doesn’t take a rocket scientist to figure out that debt levels would have to rise to sustain any kind of economic expansion.
This income stagnation itself must be understood as a by-product of a generalized decline in the rate of profit. A declining rate of profit is an inherent feature of capitalist development, as theorized by Marx. The basic argument flows from Marx’ extrapolation from the Labour Theory of Value that he inherited from classical economists like Ricardo, in particular, and Smith. The idea is that an economy based upon exchange requires a universal equivalent – how else to compare software and sneakers? That universal equivalent is labour and that, in the final analysis, is the basis of all exchange value, including the exchange value of labour power itself. Labour, the universal commodity, has a unique quality in that it can produce more value than is required to reproduce it. That surplus is the source of profit. But in the competition between firms across the whole of the economy, each tries to achieve greater labour efficiencies than the other. In the immediate term, company A may benefit from investment in a labour-saving device or production method. But once labour saving investment is generalized over the entire economy, the result is that the products of the economy contain less labour and therefore less exchange value. It is an irony of capitalism that in its ceaseless drive to become more efficient to increase profits, it undermines the basis for profits itself.
One of the ways the system seeks to extricate itself from crises of profitability is to make workers work harder, either by lowering their wages or by extending the workday or making their labour more intensive. This can at least partly explain the stagnation of wages in the US and the rises in productivity since the Reagan Revolution of the 1980s. The same process is visible in the present recession with the Bureau of Labor Statistic reporting that unit labour costs have fallen by 5.9 percent in the second quarter of 2009. Business sector productivity increased 6.5 percent and manufacturing productivity by 4.9 percent in the same period. The US is also near the top of the heap in terms of number of hours worked per year. As a result, the US is number two in the measure of worker productivity. And according to the the Bureau of Labour Statistics, wages have been been declining since 2004, the height of the boom. It is likely that “productivity” will rise further as the recession plays itself out and employers roll back wages, force more overtime and more intense work from their workforce.

“Compensation so far in 2009 has been cut by the largest amount in nearly two decades, with a government index of real average weekly earnings down 1.9 percent since its high point last December. And the average workweek - now down to 33 hours - is the shortest on modern record.”

However, these mechanisms have to date been unable to fully counteract the decline in the rate of profit and the evidence is in the growth of debt, on the one hand, and in the growth of financial services, on the other. The move into financial services should be seen for what it is – the rise of a casino economy in the face of a stagnating real economy where profitable investment opportunities have become scarce. The graph below from Monthly Review shows the rise of financial profits as a percentage of total profits. This casino can provide a stimulus – just as the government printing money can provide a stimulus. But ultimately there is a piper to be paid because no new value is being created in these sectors. Since the Black Monday crash of 1987 paying the piper has been put off by simply piling debt upon debt to stave off the full effects of each bubble economy. As John Bellamy Foster notes:

“From this perspective, capitalism in its monopoly-finance capital phase has become increasingly reliant on the ballooning of the credit-debt system in order to escape the worst aspects of stagnation. Moreover, nothing in the financialization process itself offers a way out of this vicious spiral. Today the bursting of two bubbles within seven years in the center of the capitalist system points to a crisis of financialization, behind which lurks deep stagnation, with no visible way out of the trap at present other than the blowing of further bubbles.”

Nor is this view of the instability engendered by the financialization of the economy limited to Marxists writing in radical journals. Wolfgang Munchau, writing in the Financial Times also points to the growth of the financial sector as a key structural reason for the growth of recurrent speculative bubbles followed by crashes. He is pessimistic that the world economy will even yet escape from this present round of crisis without further serious damage.

“Our present situation can give rise to two scenarios – or some combination of the two. The first is that central banks start exiting at some point in 2010, triggering another fall in the prices of risky assets…
“Alternatively, central banks might prioritise financial stability over price stability and keep the monetary floodgates open for as long as possible. This, I believe, would cause the mother of all financial market crises – a bond market crash – to be followed by depression and deflation.”

However Munchau, unlike Foster, believes that the growth of the financial sector is the root of the problem. For Foster, this growth is symptomatic of the aging of the system and the decline in profit rates. That is why the reaction of the Fed to the bursting of the dot com bubble was to drop interest rates to historic lows and print money. And it is why Ben Bernanke is doing the same thing this time around. Because the only mandated response that they have is to create new bubbles to solve the crash caused by the last one. The present return to growth should be seen as part of this same dynamic of reflating. The housing market, for instance, has returned to growth after catastrophic declines. But this has more to do with an interest rate close to zero and the offering of an $8,000 tax credit for all new home buyers. That credit is government debt that the population will have to pay off eventually and it is encouraging people to borrow more money to reinflate the sector. How many times can they pull this trick?
To deal with the underlying causes would require a qualitative break from neo-liberalism either by extracting significant concessions from capital or a deep attack on the living standards of the working class. Neither of these is on the cards in the short term – to raise taxes on the corporate sector or the rich would undermine the competitiveness of whatever country did it viz. those countries that didn’t at the hands of those same financial forces that caused the crisis in the first place. And while working class living standards can always be driven down further, assuming workers accept such attacks, such a decline will nonetheless hurt the ability of “consumers” – who are mostly workers – to play their traditional role of driving economic growth.
Finally: the present period of instability began with the decline and then relative stagnation of profit rates in the 1970s. The first flush of that crisis ended with the coming to power of Reagan/Thatcher/et al representing a neo-liberal/financialization solution. The appearance of speculative busts, starting (in particular) with Black Monday in 1987, followed by the debt crisis in Latin America and the "Lost Decade" in Japan after its property and asset bubble burst in the early 90s, were the opening shots of a new type of crisis, each one nearer and more severe than the last. As Munchau and Foster both note, the resolution of this present crisis by inflating another asset bubble only makes the eventual hangover that much worse. If, at some point, investors stop buying US dollars and it falls to its real value, based upon the relationship of the quantity of money in circulation against the amount of actual production – there will be hell to pay for the ghosts of bubbles past. Nobody can know when or how that endpoint will come – or if the ruling class can find a way out of the present crisis – but what is certain is that this recovery will be the precursor to the next crisis in the not very distant future. The era of the post-war boom ended in the 70s, and now the neo-liberal debt supported booms are coming to an end and it won’t be pretty. As Munchau concludes his article: "For all we know, there may not be a safe way down."